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Interest costs and the optimal maturity structure of government debt

Nosbusch, Yves (2008) Interest costs and the optimal maturity structure of government debt. Economic Journal, 118 (527). pp. 477-498. ISSN 0013-0133

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Abstract

The government faces a trade-off between the benefits of tax smoothing and an associated increase in expected interest costs when choosing its optimal debt portfolio. The article solves for optimal policies in an incomplete markets model where the government uses two debt instruments, long-term and short-term non-contingent, nominal bonds. In this setup the basic prescription is to borrow long and invest short even though equilibrium expected interest costs are higher on long-term debt. The resulting welfare gains are close to what the government could achieve with complete markets. Significant welfare gains are possible even in the presence of leverage constraints.

Item Type: Article
Official URL: http://www.wiley.com/bw/journal.asp?ref=0013-0133
Additional Information: © 2008 The Author
Library of Congress subject classification: H Social Sciences > HJ Public Finance
Journal of Economic Literature Classification System: G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation
H - Public Economics > H6 - National Budget, Deficit, and Debt
H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt; Debt Management
Sets: Departments > Finance
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 21 Dec 2010 13:26
URL: http://eprints.lse.ac.uk/31032/

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